Excise taxes are taxes on specific commodities and are usually per unit taxes. If a per unit excise tax is placed on some good, the producer or seller of that good is expected to pay a fixed amount of tax for each unit sold, regardless of the price at which the product sells. In the US, excise taxes are common on alcoholic beverages, tobacco products, and gasoline.

Sales taxes are ad valorem taxes. Sales taxes are a percentage of the retail price of the product sold. At a store with higher prices, you pay more in taxes for the same product, because the price is higher. Both kinds of taxes would apply to some goods in most parts of the U.S.

The analysis of a per unit or an ad valorem tax are very similar but we focus on per unit excise taxes in this section as the simplest of these taxes. The insights gained here apply perfectly well to most kinds of taxes.

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